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2022 (7) TMI 325 - AT - Income TaxRevision u/s 263 - claim of deduction of expenditure and depreciation but no revenue has been earned - Pr.CIT has directed the AO to make further enquiry on the admissibility of expenditure, major portion of which is depreciation of software obtained by the assessee AND since the assessee has not earned any revenue even after few years of above said commencement, AO has not done enquiry for allowing the said expenditure - HELD THAT - Pr. CIT s inference that AO should make further unspecified enquiries so that assessee should not be allowed expenditure and the depreciation because the assessee has not earned any revenue is not based upon any material whatsoever. Except for an endeavour to embark upon a fishing roving enquiry, there is no merit in the order passed by ld. Pr.CIT. In our considered opinion, the basic premise on which Pr.CIT has invoked his jurisdiction u/s 263 is legally not sustainable. Hence we set aside the order of the ld. Pr.CIT and decide the issue in favour of the assessee.
Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act. 2. Determination of whether the assessment order was erroneous and prejudicial to the interests of revenue. 3. Evaluation of the commencement of business activities and the allowability of business expenses. 4. Examination of the applicability of Explanation 2 to Section 263. 5. Validity of the Assessing Officer's (AO) enquiries and the responses provided by the assessee. Detailed Analysis: 1. Jurisdiction under Section 263 of the Income Tax Act: The primary issue revolves around whether the Principal Commissioner of Income Tax (Pr.CIT) correctly assumed jurisdiction under Section 263, which allows revision of an assessment order if it is deemed erroneous and prejudicial to the interests of revenue. The assessee argued that the Pr.CIT erred in assuming jurisdiction as the original assessment order was neither erroneous nor prejudicial to revenue interests. 2. Determination of whether the assessment order was erroneous and prejudicial to the interests of revenue: The Pr.CIT held that the assessment order dated 22.03.2016 was erroneous as it allowed business expenditure, including depreciation, despite the assessee not having commenced business activities. The Pr.CIT noted that the assessee had not generated any revenue from the software license purchased during the assessment year 2012-13. The Pr.CIT directed the AO to reassess the commencement of business activity and the allowability of expenses. 3. Evaluation of the commencement of business activities and the allowability of business expenses: The assessee contended that the business was set up during the year under consideration, and therefore, expenses incurred were allowable. The assessee provided detailed submissions and evidence, including the opening of a bank account, hiring of requisite staff, and acquisition of a software license. The AO had conducted a thorough enquiry and was satisfied with the explanations provided by the assessee, allowing the expenses. The ITAT observed that the AO had indeed made necessary enquiries and had considered the assessee's explanations before allowing the expenses. 4. Examination of the applicability of Explanation 2 to Section 263: Explanation 2 to Section 263 states that an order is deemed erroneous and prejudicial if it is passed without making necessary enquiries or verification. The ITAT found that the AO had made detailed enquiries and had considered the relevant facts and explanations provided by the assessee. Therefore, the conditions under Explanation 2 were not met, rendering the Pr.CIT's invocation of Section 263 unsustainable. 5. Validity of the Assessing Officer's (AO) enquiries and the responses provided by the assessee: The AO had issued a show-cause notice and received comprehensive responses from the assessee, detailing the business setup activities and justifying the claimed expenses. The ITAT noted that the AO's enquiries were elaborate and that the assessee had provided satisfactory explanations. The Pr.CIT's direction for further unspecified enquiries was deemed unnecessary and without merit. Conclusion: The ITAT concluded that the Pr.CIT's order under Section 263 was not legally sustainable as the AO had conducted proper enquiries and the assessee had provided necessary explanations. The assessment order was neither erroneous nor prejudicial to the interests of revenue. The appeal of the assessee was allowed, and the order of the Pr.CIT was set aside.
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